January was great, now what?

Igor Manukhov - Feb 10, 2023

This recent rally is the most constructive so far since 2021, however is running into resistance. Put money to work on pullbacks for long term positions.

One of the most fascinating observations from last year was a downward sloping trendline (red line) which acted as a very strong resistance point for the market. Just think about it, the market tried and failed to break through that trendline 3 times in 2022. We finally broke the trend this January. There are a few things to consider.

 

Positives:

 

  1. A positive January historically means a pretty good rest of the year for the stock market.
  2. Momentum turned positive for the first time since 2021. We measure momentum using MACD indicator (Moving Average Convergence/Divergence indicator). In a strong bull market, MACD (black line) should be above zero (positive), indicating strong upward momentum.
  3. We have broken above a very significant downward sloping trendline.
  4. The 50 day moving average crossed above the 200 day moving average (golden cross). Historically this has been an excellent confirmation signal that the uptrend is getting stronger.

 

Negatives:

 

  1. The January move was so strong and quick that the market will likely need to take a breather.
  2. We are running into a pretty significant area of resistance that stopped previous rallies (4100 - 4200 points, green horizontal line).
  3. Still a lot of uncertainty around FED rate hikes and recession risks.

 

Given the strong chart set up and the fact that the market is forward looking, I am inclined to expect the market to be higher at the end of the year than it is now. Therefore, I would recommend to take advantage of any market dips and to accumulate high-quality equities for long term holding.